The following interview appeared in Lexology Navigator in December 2016.
What is the current state of the M&A market in your jurisdiction?
The M&A market in Canada is relatively stable year on year, and is both a reflection of and affected by the overall state of the Canadian economy.
At a macro level, the Canadian economy will grow in 2016 at a rate of 1.2% and is expected to be in the same range or slightly higher in 2017. Canada's economy is still weighted towards a resource-based economy, but there is diversity. As such, Canada's growth and performance in 2016 were affected by soft resource prices. To illustrate this, the province of Alberta - which accounted for a disproportionate amount of Canada's growth until 2014 - will contract by 3.0% in 2016, which is a slight improvement on 2015. Alberta is forecast to return to positive growth in 2017.
Canada's economy in general, and M&A in particular, will continue to be affected in the short to medium term by the following factors:
- Low price of oil - barring a major geopolitical event, it is unlikely that oil will go above $60 for a couple of years.
- Weak global economy - as a resource-based economy and a net exporter of goods, Canada is affected by an overall weak global economy. While Canada's largest trading partner is the United States, and there are regions and sectors in the United States which show strength, there are many global soft spots and areas of uncertainty. China continues to grow but is shifting to a more services-based economy, resulting in a lower demand for oil. There is an overall shift in growth patterns from the economies of North America, Europe and Japan to those in China and other emerging Asian countries.
- Anti-globalisation is real and growing - this trend is evidenced by the Brexit vote and the election of Donald Trump as US president. There has been a general increase in volatility over the past two years due to increased geopolitical and security risks.
Despite these risks, the Canadian M&A market is healthy and stable and there are reasons for cautious optimism. The federal Liberal government has committed to spend in areas that will support enhanced productivity and competiveness, including major infrastructure and defence. With the recent US election, there is more optimism that major US pipeline projects will be approved.
In the mid-market, it is a seller's market due to strong multiples, large pools of available capital, low interest rates, moderately strong demand and tight supply. Canada is seen by international buyers as an attractive and safe place to invest, due to strength in talent, a knowledge economy, strong democratic values and citizenship, innovation and its financial systems and institutions.
In terms of larger transactions, Canadian financial institutions (eg, TD and CIBC) continue to be buyers, including outside Canada. There are pockets of strength and activity in the real estate, telecommunications, agricultural and metals and mining sectors. Although consolidation in the oil patch has been slow as companies waited for the 'bottom', there have been several notable deals - for example, TransCanada Pipelines' acquisition of Columbia Pipeline ($10 billion) and Enbridge's $37 billion acquisition of Spectra, which owns Union Gas. If as anticipated Alberta returns to growth in 2017, there should be a noticeable pick-up in M&A in this sector.
Have any significant economic or political developments affected the M&A market in your jurisdiction over the past 12 months?
The federal Liberal government has allocated funding to areas that will support enhanced productivity and competiveness, including major infrastructure and defence. There is also increased focus on the environment, with the federal government announcing a plan that would require all provinces and territories to have some form of carbon pricing by 2018, typically in the form of a specific tax or levy or a cap-and-trade system.
Canada recently signed the Comprehensive Economic and Trade Agreement with the European Union which, when implemented, will give Canada and Canadian-based businesses better access to the world's second-largest market. Canada is also a party to the Trans-Pacific Partnership (TPP), a trade agreement among 12 Pacific Rim countries.
A Trump administration will have some effect on the North American and Canadian economies, as well as on cross-border trade, which will affect the TPP and possibly the North American Free Trade Agreement. There is also guarded optimism that the Trump administration will be more favourably inclined to pipelines that are beneficial to the Canadian energy sector.
Are any sectors experiencing significant M&A activity?
The industry groups experiencing significant M&A activity in terms of the number of deals in Canada are:
- real estate;
- metals and mining;
- precious metals; and
- information technology.
The industry groups experiencing significant M&A activity in terms of value in Canada are:
- real estate;
- information technology;
- energy; and
- consumer products
The volume of mid-market deals in 2016 compared to 2015 has stayed relatively the same. However, the number of mega-deals has decreased, bringing down the total value of transactions.
Are there any proposals for legal reform in your jurisdiction?
In its November 2016 Fall Economic Statement, the government announced two important developments related to the Investment Canada Act with the intent of facilitating increased foreign investment in Canada:
- The government will address concerns that the review process and criteria for national security reviews are unclear. The government will now publish guidelines under which investments are examined under the national security provisions.
- The government will also increase the financial threshold under the Investment Canada Act for the mandatory requirement for a pre-closing review and approval of a direct acquisition of control of a non-cultural Canadian business by a foreign investor that is ultimately controlled by residents of a Word Trade Organisation member and is not a state-owned enterprise. The threshold of a $600 million enterprise value will be increased to $1 billion in 2017, two years sooner than originally planned by the former Conservative government.